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Guide to Scotland's new buy-to-let tax

The Scottish Government is just weeks away from introducing a new tax which will in most cases add thousands of pounds to the cost of buying a second home.

The SNP's Land and Buildings Transactions Tax (LBTT) amendment will introduce a 3% levy on buy-to-let properties or second homes worth over £40,000 from 1st April.

Here's our guide to the changes.

What is the 3% surcharge and who pays it?

The additional 3% LBTT surcharge will apply to all purchases of a second residential property from 1st April. The only exception to this is where missives for the purchase were concluded prior to 28th January 2016.

The Bill to introduce the Additional Dwelling Supplement was published on 28th January 2016. Therefore, if you concluded missives before 28th January 2016 you will not be liable to pay the supplement, whatever the date of entry is.

It is not envisaged that this will affect many transactions, although this is likely to be relevant to a number of new build purchases which generally have a longer period between conclusion of missives and the settlement date.

The extra tax applies to anyone who is buying additional residential properties, for example a buy-to-let or holiday home, it will apply to the whole of the UK.

What if the home I already own is abroad?

You will be liable to pay the 3% surcharge even if the home you already own (or part-own) is abroad. So, if you have a holiday apartment in Spain and were buying your first home in the UK, you’d have to pay the 3% additional tax.

How is the extra tax charged?

LBTT is charged as a tiered tax. This is like income tax, where you only pay the higher rate on the slice above any threshold. However, the 3% surcharge will work as a slab tax which means it will apply to the entire purchase price of the property.

Supplement only payable on transactions above £40,000.

The 3% supplement would be applied to the whole purchase price, and not just the proportion of the price above £40,000.

As an example, if you are buying a second home that costs £300,000, the extra 3% LBTT would equate to £9,000, or 3% of the entire price. If you add that onto the £4,600 regular LBTT bill on a home of this value, you’d end up paying £13,600 in total.

What if I am buying a second home for my child?

If the second home you are buying is for your child and you already own a home, you will be liable for the 3% surcharge if your name is on the property deeds – even if it’s joint with your child’s name. If you bought the home for your child outright and just their name was on the deeds, the 3% surcharge would not apply.

What if I am buying with a partner who doesn’t already own?

If you have a second home and you are buying jointly with your partner who doesn’t already own, the 3% LBTT surcharge will still apply.

What if I am letting my home to buy another one?

If you move out of your main home (Home A), let it out and buy another one to live in (Home B), you will still be charged the 3% LBTT surcharge. However, the government offers some reprieve here in that if you sell Home A within 18 months of completing on the purchase of Home B, you’ll get the 3% surcharge refunded.

What if I inherit a property?

No LBTT is payable on properties that are inherited, so the 3% premium is not relevant. However, if you have inherited a property and go onto purchase a second home without selling it, you will be hit with the surcharge.

What if I am a professional landlord?

The government is considering whether to exempt companies that own 15 or more properties from the surcharge on any further purchases. It’s also considering whether to exempt individuals (and companies) making bulk purchases of 15 homes or more.

Can I set up a limited company to avoid the surcharge?

The government has a keen eye on preventing tax avoidance. So while a professional landlord (as outlined above) will not be liable to pay the 3% surcharge, you won't be able to escape it by setting up a limited company and buying an additional home that way.

Any purchase of a dwelling, including a first purchase, by a company or any other type of non-natural person or body will mean that the Additional Dwelling Supplement will have to be paid. The Additional Dwelling Supplement applies to all purchases of residential properties by companies and other non-natural persons whether or not they already own a residential property.

Not having this rule would have introduced a relatively straightforward way to avoid paying the supplement. For example, an individual buying a second residential property through a company they owned could have avoided payment of the Additional Dwelling Supplement.

Are there any exemptions?

You won’t pay the 3% surcharge on second homes that cost under £40,000. Caravans, mobile homes and houseboats are also exempt.

Are there any reliefs to the Additional Dwelling Supplement?

At stage 2 of the Bill process on 2 March 2016, the Finance Committee agreed Scottish Government amendment to introduce a relief from the Additional Dwelling Supplement for purchases of six or more dwellings.

Can I just omit to tell my solicitor about the fact I already have a property?

Solicitors and property lawyers are under instruction to ask buyers outright if they already own another property. If you don’t answer truthfully it’s tantamount to fraud and potential penalties could be a lot worse than meeting the cost of a 3% extra LBTT.

Speak to an expert

Aberdein Considine offers a full property, legal and financial service for landlords across Scotland. If you would like to speak to one of our experts, call 0333 0066 333 or click here.